What is Valuation Cap and Valuation Floor?
Learn more about Valuation cap and Valuation floor!
A 409A valuation is a formal appraisal of the fair market value (FMV) of the common stock of a private company. It is used to determine the minimum exercise price of stock options and is typically performed by an independent third-party valuation firm. This is the only method you can follow to stay compliant from the tax legislation perspective when it comes to granting options to US-based employees.
Giving your US employees options where the exercise price is not set in line with 409a valuation can result in hefty tax burden and penalties for your employees. The exercise price of an option cannot be set below the FMV calculated in a 409A valuation; however, it can be set above it.
This is because, for the IRS, it would mean that the employees have received stock options at a discount and thus have already made money, taxable at the time of grant. Also, for the SEC, the company by understating the value of its equity value isn’t expensing the options in a fair manner to improve profitability.
If you don’t fully grasp the requirements, and want to have a clear understanding of inputs, process and next steps when it comes to 409A valuation, speak with our experts and receive the final report within two weeks.